15 December, 2006

Russia for Russians

Posted by alex in Alex Linder, oil, Russia at 9:45 am | Permanent Link

Russia’s Great Gas Grab

By Thomas Lifson

The global economy is held together by silken threads of trust, the belief that contracts will be honored once signed. Without the assurance that governments will honor their agreements, individuals and companies would be reluctant to advance the substantial sums necessary to undertake large scale projects, such as drilling for oil or natural gas.

The ability of the world to generate sufficient energy supplies depends on the willingness of investors to take huge risks in exploring and developing new oil and gas fields overseas. Often, that development must take place in lands not fully integrated into the modern capitalist economy. When the technical risks are amplified by the addition of the risk of arbitrary government actions, energy development will naturally slow down. Supply will be constrained, and prices will rise even higher.

Russia is in effect muscling in on the highly promising but very expensive natural gas field Shell Oil and its Japanese partners Mitsui & Company and Mitsubishi Corporation have developed off Sakhalin Island, east of Siberia and north of Japan. Much of the construction work is done, but further work has been delayed by administrative considerations. The project had experienced substantial cost overruns. [Full disclosure: the author has worked as a consultant for both Mitsui and Mitsubishi over a considerable period of years in the past.]

The Project

Sakhalin 2, as it is known, is an offshore natural gas field, set to purify, cool and condense gas to about 1/614th of its volume at atmospheric pressure, and ship it to Japan , South Korea and the US on highly specialized expensive cryogenic LNG tankers, where the gas will be warmed and fed into distribution via conventional gas lines. LNG projects are of necessity large, expensive, and technically challenging.

The very first large scale LNG project opened in Algeria, in 1964, supplying Britain and France. Since then, large projects have opened in countries like Indonesia, Brunei, Qatar, Malaysia, Nigeria, and others, including the United States.

At present, it is estimated that $22 billion (or more) will be the final cost to complete development of Sakhalin 2, with Shell owning 55% of the project, Mitsui 25% and Mitsubishi 20%. Russia, via its giant monopoly natural gas company Gazprom, has let it be known over the past several months that it wanted a chunk of the project, probably a controlling interest, for itself. In effect, having earlier lured the companies into pouring billions of dollars and huge amounts of effort into the project, once the project appeared to be a success, Russia has moved to grab a bigger share of the pie, previous agreements be damned.

Playing Hardball

Natural resource industries have a sordid history of exploitation by both companies and governments. In the past bribery and highly imbalanced terms sometimes gave companies the upper hand as resources were wantonly plundered. But since the 1960s, states with potentially lucrative natural resources have played harder to get.

The monopoly on the legitimate use of force enjoyed by states usually gives them the ultimate bargaining leverage in the contest. They can send in soldiers and take over whatever physical installations exist, and companies, aside from those few which have hired mercenaries in the past, are powerless to stop them, at least in the immediate time frame. Soldiers command territory with “boots on the ground,” whether in the copper mines of Katanga or the oil fields of Libya.

But operating a natural resource extraction facility, especially a large one, requires many specialized inputs, and also requires smooth handling of the output. If skilled manpower, technology, transport, spare parts, distribution channels, financing, and many, many other necessities are denied to an expropriated property, governments have a hard time profiting from them.

But when governments forego the military option and merely use regulatory pressure, they can often avoid the most unpleasant consequences of outright physical expropriation, including the sort of retaliatory denial of necessary inputs. They prefer to incrementally inflict costs on the companies, to demonstrate that a little “protection” is in order, otherwise matters could become even more unpleasant.

One of the means of extortion Russia has been using is environmental regulation. From the Moscow Times:

The Natural Resources Ministry has mounted a campaign of inspections by its environmental inspectorate and threats of administrative sanctions against Sakhalin-2, the only big energy project entirely in foreign hands.

Partly as a result, a deal is taking shape for Gazprom to buy into the scheme that includes the world’s biggest liquefied natural gas project, which is due to start supplying Japan, South Korea and the United States in mid-2008.

The water resources agency has suspended 12 water-use licenses held by Sakhalin-2’s main contractor — Russian-Italian joint venture Starstroi — and given it two on Wednesday, Interfax quoted the agency’s head, Rustam Khamitov, as saying he doubted that the contractor could rectify the violations and that the licenses would be suspended.

This would prevent the group from finishing pipelines linking gas fields in the north of Sakhalin with the liquefaction plant in the south.

Analysts say pressure from the state, notably from environmental inspectorate official Oleg Mitvol, is part of a wider drive to increase Kremlin control over the strategic energy sector.

It is, of course, extortion. In its defense, Russia points out that the West has been extorting large sums form oil companies itself, over environmental issues. One has to admit they have a point.

But it is all perfectly legal (states make the laws, after all), and sometimes almost a genteel-seeming process. Guys in three thousand dollar suits engaging in extortion observe certain niceties of language and protocol, but the underlying process can be almost as brutal as sending in the troops. Thus, for instance, last week, the head of Shell, who met with the head of Gazprom over the terms of the extortion, issued an almost flowery statement, as reported in the New York Times:

A Shell spokesman, Maxim Shoob, confirmed today that Mr. van der Veer met last week with the chief executive of Gazprom, Aleksei B. Miller. Mr. Shoob said the talks were “quite positive and very constructive,” but offered no details.

Why Russia Needed Shell, Mitsui and Mitsubishi

Russia possessed a large domestic oil and gas industry in the Soviet era. It was, however, notoriously behind the technical levels of the West, and following the collapse of the USSR, foreign technologies were believed capable of substantially improving production. For a period of time, foreigners have been allowed to invest in oil and gas, so as to bring with them the technology (and capital) Russia lacked.

But in the long run, Russia’s leader Putin seems fully determined to ensure that Russia be able to supply all important oil and gas technologies from a domestic manufacturing and engineering base. To be dependent on foreign suppliers for production technology weakens the overall bargaining position of the Russian state. Should push come to shove, Russia does not want to be crippled by any cutoffs coming in retaliation for its flaunting of agreements.

The aggressive move on Sakhalin 2 confirms that Russia is moving toward a far more confrontational posture toward the rest of the world. Russia has shown a willingness to cut off gas supplies to Europe, as it demonstrated on Ukraine, using energy as a political weapon to intimidate other states. Putin knows that Russia’s energy resources are a trump card in his effort to restore his native land to the status of superpower.

But there are limits. Russia still wants foreign companies to play a role, albeit one not so prominent as originally envisioned in Sakhalin 2, 100% foreign owned. There is more development scheduled off Sakhalin, with other companies, like BP, involved. They, too, must now factor in a great political risk in their calculations of the returns necessary to justify their investments.

Shell and Russia have not agreed on terms of separation, as it were. They have to negotiate, a lop-sided exercise at best. In the end, Gazprom will probably in theory “buy” approximately half the stakes of foreigners, out of “royalty income.” But in practice, it will be a form of expropriation, intended to give Russia operating control of something built and paid for by others. With this control, Russia can better master the complex technologies, and make them its own, as it were.

Shell, Mitsui and Mitsubishi have no choice but to make the best of it. They will smile and talk about great progress being made, hoping that Russia will allow them to achieve some return on their investment, in order to keep their resources available in the future.

We often carelessly assume that the march of progress will continue inevitably, secured by the triumph of market economies. While it is true that capitalism provides a demonstrably richer life for its beneficiaries, many powerful forces in the world do not find themselves advantaged by it. Russia, Islamofascists, and certain Euro-Socialists would rather see market forces confined and a greater number of important decisions in the hands of state or religious bureaucrats.

Russia’s move against the Shell consortium is a blow against the regime of international capitalism, in the end. By itself, it is not a major affair, but as a harbinger of things to come from Russia, it is as chilling as the Sakhalin LNG whose shipment will now be delayed by Russia’s hardball tactics.

Thomas Lifson is the editor and publisher of American Thinker.

[Original.]


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  7. 10 Responses to “Russia for Russians”

    1. Kievsky Says:

      Yahoo! Go Russia!

      National economies are far preferable to a single global economy.

    2. New America Says:

      Wrong, for both historical and economic reasons:

      One, those “natural resources” were stolen by the Goddamn JEWS with Yeltsin as their front man, for about a penny on the dollar. Even then, if memory serves, their valuation models all looked at $30 USD barrel for oil. Putin is simply stealing them back.

      Two, Putin has other fields to develop, and other technology opportunities for them. Global warming means the cost of developing everything from Novosobirsk to Siberia gets cheaper every year, even as the natural resources become more valuable.

      Three, THIS issue has been bought up before:

      We often carelessly assume that the march of progress will continue inevitably, secured by the triumph of market economies. While it is true that capitalism provides a demonstrably richer life for its beneficiaries, many powerful forces in the world do not find themselves advantaged by it. Russia, Islamofascists, and certain Euro-Socialists would rather see market forces confined and a greater number of important decisions in the hands of state or religious bureaucrats.

      in reply:
      We note that Russian never had a mittlestand maket model; it was either real small – small farmers, very small shop-front businesses, or very big – State-sponsored enterprises.

      Thus, THEIR conception of “free markets” and “capitalism” means small businessmen, and billion dollar enterprises – no middle ground, which is where skills are best developed, and honed (hint: no bureaucracy to get in the way of fast learning curves).

      As well, the Russian model of capitalism’s “beneficiaries” included what they see as “useless eaters,” who dine first, and take the best share for themselves – bankers, and people who own and manipulate share valuations.

      another point the author made:
      Russia’s move against the Shell consortium is a blow against the regime of international capitalism, in the end. By itself, it is not a major affair, but as a harbinger of things to come from Russia, it is as chilling as the Sakhalin LNG whose shipment will now be delayed by Russia’s hardball tactics.

      in reply:
      All this means is that the price of LNG will go up, the de facto expropriation will be self-liquidating as an investment, and business will go on.

      These arguments about nobody dealing with a sovereign nation that renegotiates contracts is ludicrous; these were the arguments made during the YUKOS affair, and that seems to have concluded to the benefit of numerous businessmen and Russia, and the detriment of the Goddamn JEWS.

      New America

      An Idea Whose Time Is HERE!

    3. Lokuum Says:

      ” Global warming means the cost of developing everything from Novosobirsk to Siberia gets cheaper every year, even as the natural resources become more valuable.”

      You’re kidding, right? Ludicrous. All the commie intellects moved into environmentalism after the fall of the soviets, it’s an internationalist scheme. The reason the right now accepts global warming is that they get to play on the world stage. The world may be in a warming trend-in a year, it could head toward a cooling trend. They don’t know.

      Your other coments a good. IMHO

    4. Shabbos Shabazz Says:

      Global warming is completely true. It just means the planet is going to hell.

      In 1968, in front of the bookstore at Long Beach State University, I was talking to the head shithead of SDS (Students for a Democratic Society- Dennis Rogan. Other members were of the Kike persuasion). Rogan explained: “After Vietnam, our next assault on capitalism (America) will be the environment.”

    5. West Coaster Says:

      New America, I don’t care if Putin is ‘stealing back’ from jews. The real question lies in determining his motives. I hope he playing close to the vest, looking long range at out maneuvering the haters of whites, the jews.

      Global warming is nothing more than a fairy tale. It was cooked up (pun intended) to go after advanced white economies and businesses, to turn them over to Asia. One gets the impression the killers in charge want to make Asia the boom town for awhile, and then pull the plug on them. Of course, they’ll have all the solutions, just like they do here.

    6. New America Says:

      A quick reply to Lokum:

      My authorities on the reality of global warming – not as to causation, but simply as to its reality – are the smartest money-men on the planet, the risk management actuaries for the insurance industry.

      They say it’s real enough for them to say, “We will not accept any more policies in THESE areas (waterfront/waterview/low-lying water access).”

      A friend of mine in North Carolina just say the value of his oceanfront property decline precipitously, as neither the State, nor the Feds, will “assist” with the insurance costs with property just a little ways up the beach from him. His insurer told him now, right now, would be an excellent time to sell.

      Incidentally, already, American and Canadian strategic thinkers are arguing over WHAT they will do when the New Northwest Passage develops, in around 2040 to 2050, if current trends hold.

      Sooner, if they accelerate.

      This has a lot of implications for US energy independence, some good – less demand for oil, hopefully – and some not so good, like the Alaska Pipeline sinking into the thawing permafrost, and breaking so badly, so often, that an entire new pipeline will be required, sooner, rather than later.

      I don’t claim to understand climate forecasting models, and am trusting that when trillionaires – the insurance companies – place billion dollar bets – underwriting investments – they, who can afford the smartest men on the planet, know enough about what they are talking about to drive nice cars, live in beautiful houses, and own Swiss banks.

      Swiss banks, and ours.

      New America

      An Idea Whose Time Is HERE!

    7. Carpenter Says:

      Typical Russian disregard for laws and rights. Russian gangsters rip off foreign investors, and so does the state. You don’t want to live in Russia, no matter what the system. It is all about kicking down and licking up. For now Russia’s kleptocracy suits us, as they disrupt the global economy a little bit and we want any economic disruptions we can get, but they would also have done this to Western nations if there were no Jews around.

    8. Agis Says:

      Wait till the Chinese start ‘nationalizing’ all the American factories in China. All the sell-outs will either have to become Communist and relocate or kindly fuck off. That day is coming.

    9. New America Says:

      Agis makes a stronger point than many realize.

      ALL of the substantial manufacturing corporations in China use a lot of American money, have a “highest technology available” clause in their contracts – meaning our most advanced technology MUST be made available and used in that factory – and are 51% owned by the People’s Liberation Army, under a front name.

      Am I the only one who noticed that GM North America “created” 20,000 jobs in GM Shanghai, while simultaneously letting go/”offering buyouts” to 20,000 American workers?

      Am I the only one who thinks GM is liquidating production capacity in North America, in preparation for the day GM/NA files for bankruptcy, gets rid of the “burdensome legacy costs” of retiree pensions – giving them to the Pension Benefit Guaranty Corporation – and turns the medical benefits off?

      This model has worked very well for what is left of the American steel industry, where, it seems, it was tested out as a very successful dry run?

      GM/NA could also rid itself of it’s win problems of too many dealers – State laws save them from being closed out by GM – and even too many products, as well as too many retirees – all at once.

      And, as for the burden of Affirmative Action, last time I looked, the Colored population of China was just about zero.

      My God!

      The GM Shanghai Young Comrades Worker’s Brigade would begin their morning calisthentics with a “call and response” workout’ “urban” beat to the Michael Richards “Too Much Truth” Rant:

      Begin, Comrades!

      “Stick a fork”

      STICK A FORK!

      “Up your ass!”

      UP YOUR ASS!

      “NIGGER!”

      NIGGER!

      Toe touches on three, two,…

      “Goddamn NIGGERS!”

      Goddamn NIGGERS!

      Excellent comrades! Keep those backs straight for push-up on three, two…

      “Call the police”

      CALL THE POLICE!

      “There’s NIGGERS over here!”

      THERE’S NIGGERS OVER HERE!

      New America

      An Idea Whose Time Is HERE!

    10. Hoosier Says:

      I believe global warming is true. My source is less authoritative than
      risk management actuaries. My niece is studying creeks and creek beds in college. She determined from her studies that global warming is happening. I don’t know how she went about determining it, but I’m good at reading people, and I could tell she knew what she was talking about when I was asking her questions.

      I asked her if she could tell if it was because of some sort of cycle of nature, or manmade, and she didn’t know. I know that man can effect the environment. I’m not sure how serious the global warming is.

      I have a question. Does anyone know if the current global warming
      is because of a cycle of nature, man made, something else, or some combination?

      I’m checking in and checking out here on VNN, as I’m busier than that one armed paper hanging guy. This thread will probably be closed by the time I get back, so I won’t be able to reply. But I will read any replies when I get the chance. Thanks for any help anyone can give me. Alex, I hope to catch up sometime on that long thread about homosexuals in Kirksville Today.